Shipping's waterline deadline
The clock is ticking for an industry that must conform with new sulphur rules. Not everyone will be ready in time
Major infrastructural and organisation challenges confront the oil and shipping markets in the run-up to the 2020 International Maritime Organization (IMO) deadline for the introduction of an 0.5%
sulphur content cap on marine fuels. It will affect the way oil refiners and traders; the bunkering industry; and the shipping industry do business. "Nobody really knows how it's going to play out," says Andrew Laven, regional manager for Middle East and Africa at the Bomin Group, a bunkering company with operations worldwide. Adrian Tolson, Senior Partner at 20/20 Marine Energy, a consultancy which advises the shipping and bunkering industry and governmental bodies, adds that "a lot of things have to be worked out" before the outlines of a new bunker-fuels market incorporating a balance of 0.5% sulphur fuel oil, marine diesel, and liquefied natural gas as a bunker fuel, emerge.
A key market assumption is that sufficient low-sulphur fuel oil will be in place to maintain baseload supply while shipboard emissions-abatement technology and LNG increase their share of the market. Energy consultancy
Wood MacKenzie estimates that Ultra Low Sulphur Fuel Oil (ULSFO) with less than 0.5% sulphur content will make up about 0.95m barrels a day, or about a fifth of estimated world bunker consumption, when the IMO limits are implemented in 2020. It then expects that "scrubbers", which minimise shipboard sulphur oxide emissions, will progressively be installed on most remaining vessels. Like others, Wood Mackenzie believes a major increase in marine gasoil demand, matched by increased refinery conversion capacity worldwide, will make up for any necessary balancing volumes.
But some in the industry think the solution will not be that neat. To begin with, even if it's assumed that sufficient compliant product is available at a global level, that doesn't guarantee that the right product is available in the right place. Laven at Bomin suggests that new oil-trading opportunities are likely to arise before 2020 as the industry moves to adjust the availability of blendstocks at key bunkering ports to keep product compliant. Industry officials add that new product blends and standards will be required to guarantee fuel quality after 2020. For example, the ISO 8217 standard applicable to fuel oil hasn't been updated since 2010, and only applies to 1% sulphur fuel oil, not to 0.5%. In the absence of new standards, many bunkering firms are building stronger relationships with major oil companies to ensure uniform product quality at all their delivery points, says 20/20's Tolson.
The time for implementing significant new industrial projects to meet the 2020 deadline is running short
Further, the assumption that scrubbers, which reduce SOx emissions through a variety of techniques including the use of natural seawater alkalinity, caustic soda, and lime, will be a broadly applicable solution may be sorely tested. Industry analysts estimate that as 2018 begins only about 300 ships globally are fitted with scrubbers, and those are mostly passenger vessels and ferries, making it unlikely that a significant proportion of the global fleet, numbering in the thousands, will be fitted with scrubbers by 2020.
Industry officials estimate that scrubber payback based on an average 2017 spread between gasoil and HSFO prices of about $175 per tonne is about seven years, although it would only be two years if the spread were to widen to $585/t, which many consider unlikely as the widespread installation of scrubbers would increase the shipping industry's HSFO consumption and keep the spread narrow. A longer payback risks additional capital expenditure if, as many expect, the IMO shortly broadens emissions remits to include tighter nitrogen oxide and eventually carbon dioxide emissions, to which scrubbers are not the answer.
Oil refiners face contracting world demand for fuel oil as industrial and power generation consumption steadily diminishes because of environmental concerns and increased availability of natural gas. Analysts believe that relatively simple refiners, particularly in the EU, likely will maximise their intake of sweet, low-sulphur crudes to maximise their output of LSFO. More complex, better capitalised companies such as
ExxonMobil and Total are modifying their refineries in key northwest European markets to increase their gasoil production. In Russia, tax and demand changes have led to widespread investment in new conversion units which are reducing fuel oil demand and increasing gasoil output.
While LNG as an alternative fuel is widely touted as addressing all likely emissions challenges to shipping, including NOx SOx and CO2 limitations, the LNG industry's ability to put sufficient capacity in place within the next decade is doubted. Wood MacKenzie believes that even assuming an increase of 70% in LNG use for bunkers by 2020, only about 40,000 b/d of marine oil demand would be displaced. And industry participants say that demand displacement would mostly occur in existing Emissions Control Areas, where sulphur content in marine fuels is already limited to 0.1%. Further progress is likely to be slow because of the high capital-expenditure requirements of LNG systems, and the lack of small-scale LNG infrastructure outside established LNG-port facilities.
A key impediment to clarity ahead of the IMO's 2020 sulphur deadline is the lack of any indication as to how the new regulations will be policed or what, if any, fines will be imposed on violators. A meeting of the IMO's Marine Environmental Protection Committee in July 2017 agreed to work through an approach for implementation of regulations through 2018 and 2019. Flag states and ports are likely to assume key responsibilities for monitoring marine fuels supply quality. While major ports such as Singapore or Rotterdam are able to act expeditiously once they know the rules to be applied, the regulations need to be agreed first. The levels of fines for non-compliance will be key, as fines which are too low won't incentivise the market to conform to the 2020 regulations.
But industry officials point out that the time for implementing significant new industrial projects to meet the 2020 deadline is running short—new industrial projects tend to take a minimum of three to five years to implement. "No one knows how this is going to be policed. No one knows how this is going to be regulated", says one bunker industry official.
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